All bank accounts in Cyprus to be forcibly raided under terms of new bailout

In a quite extraordinary turn of events that has left Cypriots reeling and the international community in shock, bank accounts in Cyprus are to be forcibly raided under the terms of a new bailout agreement.

In an astonishing escalation of the Eurozone crisis, depositors who hold less than 100,000 Euros in their account will be forced to pay a one off tax of 6.75% of their total holdings, while those with more than €100,000 will lose 9.9%.

Lawmakers on the island will vote on the shocking measures today after Cypriot politicians, eurozone officials, the International Monetary Fund and the European Central Bank agreed at the weekend that savers in the island's traumatised banking system would be hit in return for €10bn in bailout aid. Without it, Cyprus faces bankruptcy.

As panic descended on the streets of Cyprus – concern was flooding through international financial markets. If this can happen to private depositors in one country, what is to stop it happening in another. And if citizens in other countries teetering on the bailout brink like Greece see this, will they not rush to pull their money out of banks and trigger a meltdown?

Expert reaction says it all

“The levy is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” said Joachim Fels, the chief economist at Morgan Stanley in London.

Mark Bayley, a Sydney-based credit strategist, also said it set a "dangerous precedent" and was a "bail-in of depositors".

“More contagion fears will spread through investors and it will encourage depositors in the European periphery to move their funds to a safer place, either under the pillow or to Germany,” he said.

Barclays said in a report that the deposit levy was an “ominous” sign of how bail-outs were being handled.

Lars Seier Christensen, the chief executive of Denmark’s Saxo Bank, wrote: “If you can do this once, you can do it again.”

Mohamed El-Erian, the chief executive of Pimco, the world’s largest bond investor, said: “In Europe, it could well undermine the recent tranquil behaviour of depositors and creditors in other vulnerable European economies – in particular Greece, Italy, Portugal and Spain.

“Despite assurances from European officials that Cyprus is 'exceptional’ and the measures are 'unique’, this weekend’s actions have increased the risk premium.”

"Despite reassurances from Brussels that Cyprus is a special case and that indiscriminate levies won't be a common policy tool, depositors across Europe are doubting their sincerity and are fearing that a new precedent has been set for other debt-laden euro zone countries," Jonathan Sudaria, dealer at Capital Spreads, said.

This enforced invasion of privately held accounts threatens the banking system in its entirety as confidence is stripped away in the sanctity of private depositors, let alone perceptions and attitudes toward international organisations like the IMF and the EU. From a German perspective, there is frustration that it has come to this, but German voters simply will not accept a steady flow of capital out of their country and into others that seem unable or unwilling to reform.

Approximately 50,000 British citizens (a huge proportion of which serve in the armed forces) hold bank accounts that George Osborne has promised to guarantee. Cypriot banks working in Britain will not be affected.